“The market has become big enough where you can provide a diversified exposure,” Sokol explains. “Plus, the new index eliminates currency risk.”
And reducing exposure to Europe’s low-yielding fixed-income securities could boost the yield on the VanEck fund. “We think a lot of U.S. dollar-based investors don’t want a very low yield or want to take on the currency risk,” Sokol says. “So we think a U.S. dollar portfolio is more attractive from that perspective.”
Under its prior index, VanEck’s green bond ETF had a 20% country weighting in the U.S. and a 72% weighting in European countries, according to XTF.com. Its currency exposure was 53% euro and 40% U.S. dollar.
With the new index, the U.S. now comprises nearly 30% of the country weighting and European counties collectively make up roughly 13%, according to VanEck. On a currency exposure basis, it went from 53% euro and 40% U.S. dollar to almost 95% U.S. dollar and 0.04% euro.
The iShares Global Green Bond ETF, which launched in November 2018, tracks the Bloomberg Barclays MSCI Global Green Bond Select (USD Hedged) Index. It has a strong weighting toward Europe (about 60%) and a 10% weighting in the U.S.
The hedging mechanism of the fund’s index creates 100% exposure to the U.S. dollar.
The VanEck fund has $26.8 million in assets compared to $28 million for the iShares fund. Regarding performance, the iShares fund is up 11.9% year-to-date, and it sports an annual yield of 2.48% and a SEC yield of 0.57%. The VanEck fund has gained 5.8% this year, and has an annual yield of 1.40% and a SEC yield of 0.46%.
The SEC yield is the last 30 days of accrued income, and it accounts for interest and dividends, as well as a fund’s expenses. It generally indicates what the fund is expected to pay, and its standardized formula makes it the preferred method to compare funds.
There are broader ESG bond ETFs on the market, and some of those offer higher yields than the two green bond ETFs. But given their different allocations and exposures, it’s hard to make an apples-to-apples comparison.
Green bond ETFs are a distinct animal that appeal to investors who place a high priority on the environment. But given the relatively low asset levels of the VanEck and iShares products, they’ve yet to resonate with a larger audience.
“We’ve seen a lot of investor interest over the past two-and-a-half years, and a lot of questions around green bonds and how to incorporate them into a portfolio,” says Sokol, adding that green bonds can fit within a core fixed-income allocation.
“But it’s a slow process, and there’s still the perception that you sacrifice return when you invest sustainably,” he says. “We we need to overcome that perception because with green bonds it doesn’t mean you’re getting a lower yield versus non-green bonds.”